GOTCH Professionals Center

06/09/2017

Stock market jitters at the Nairobi Stock Exchange (NSE).The latest decline in the NSE appears to be driven by portfolio investors currently shorting their long positions to channel their "hot money" into other markets they perceive to present more stable returns potential in the foreseeable future. The resulting short-term aberration, from an otherwise long-term upward trajectory, will be a short-term happenstance because it is driven by sentiment more than by fundamentals. Importantly, it opens up opportunities for long-term investments in equity, supported by the traditional technical adage of taking long positions in falling or flat assets/markets and later shorting when the price curve shows a potential sustained rise. Alternatively, investors with a short-term horizon, could exploit opportunities opening up in the money markets, where (some of) the equity short-sale proceeds are likely heading to.

Bourse shed Sh92 billion on Friday after poll case verdict

27/05/2016

"Crystallize your goals. Make a plan for achieving them and set yourself a deadline. Then, with supreme confidence, determination and disregard for obstacles and other people's criticisms, carry out your plan." ~ Paul Meyer.

18/10/2015

The case of Transcentury convertible debt is intriguing in several ways. First, the company borrowed KES 6 billion just five years ago to finance its long term investment activities. (If you have forgotten, when Uchumi went into a receivership, it was because it was unable to make good its short-term obligations that financed its branch expansion). Now, long-term investment activities generate cash inflows to firms over a long period of time and cannot effectively service short-term debt. This situation is called mismatching of assets and liabilities. Transcentury is heavily mismatched! Second, the firm's share price has been on a free fall lately, currently standing at under KES 14. When the convertible debt was issued, the conversion price was set at almost KES 50. Debtholders cannot, will not, therefore, exercise the conversion option! The debt must be retired or refinanced! Three, refinancing will hurt Transcentury because, given that it's profits have been declining (in fact, last year it reported a loss of KES 2 billion), its financial risk is very high and hence debt investors will require very high returns on a new instrument and the new debt issue might be undersubscribed. This leaves the option of a rights issue to retire the debt. Four, the problem with a possible rights offering, is that the company's price is at rock bottom and a rights (equity) issue might also be undersubscribed. Consequently, equity investors required rate of return will be very high. In practice, brilliant corporate finance managers would not issue new equity when the stock price is as depressed as Transcentury's.

Personal finance lesson: keep a close eye on your stock holdings on Transcentury. If you exit now (short position), you will exit at a loss; but you might be a winner. If you you want to maintain your long position on the stock, you must be prepared to be looking into the very long future. Or be ready for a possible bankruptcy.

http://www.businessdailyafrica.com/-/539552/2919654/-/exeej0/-/index.html

02/10/2015

A few weeks ago, world stock markets appeared poised for a major crash. We seem to have survived it. Incidentally, the fundamentals that were used to explain the crash seem to be the same ones that are going to explain why we might have "cheated" the crash! First was the recessive Chinese economy that has sent shivers across major financial markets. It's role in the current recovery can be appreciated along with today's release of bad news for the US economy. According to the US Federal Reserve (Fed), not only has job creation suffered recently but wages have also declined. To try to make the economy a little more robust, the Fed has suspended plans to raise indicative interest rates. Since the financial market in the US takes cue from Fed decisions, interest rates in the economy will stay at near-zero rates for a while.

The result of this is that portfolio investors will find fixed income securities (bonds) less attractive than equity securities (shares). The demand for equities will therefore increase relative to that of bonds. This increment in demand will cause the price of equities to increase causing a recovery in the stock market overall. However, we will see a decline in the expected returns on bonds which, relative to the decline in interest rates (also called, yields), will suppress lending. The bond market will suffer a decline!

So, why did the Fed leave interest rates low? The ready answer is that low interest rates encourage borrowing by the private sector (called, crowding in) and can therefore help increase real investment in the economy. This helps create jobs and increase wages. Further, it enables the housing market to grow as more potential homeowners can afford housing finance. The combined effect of investment in the real sector and the housing sector is expected to help "rescusitate" the economy.

But, does it always work? Well, in principle, it should! If the suppressed bond market starves the real sector of cheap funds, the revived equity market will provide more affordable finance than it otherwise would! (Note: equity finance is always more expensive than debt finance. That's an issue for another day.) Although the housing sector might not benefit as much, the net effect must be better economic prospects.

http://www.wsj.com/articles/global-stocks-rise-ahead-of-u-s-jobs-report-1443771795

Global stock markets were mostly higher Friday ahead of the September U.S. jobs report, a key piece of data watched by the Federal Reserve as it contemplates the first interest-rate increase in nearly a decade.

28/09/2015

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The GOTCH professional center, the professional center with a focus on quality and excellence. GOTCH is a knowledge-based firm with a twin-purpose: to discover and disseminate scientific knowledge and to apply the results of our knowledge discovery to proffer sound advice

30/08/2015

Personal Finance Lessons: RETURN 2
In our last lesson (please scroll down), we introduced the concept of return, in which we defined return as that which an investor receives over and above the invested wealth. We saw that return is typically expressed as a percentage of the initial investment. This percentage is more appropriately called the rate of return.

The rate of return is a versatile measure that finds use in several ways. First, it can enable investors to compare the performance of two or more investments of the same risk (scroll down to re - read the meaning of risk). Importantly, the rate of return can be expressed as a required rate to specify the minimum amount that an investor needs from an asset to make the asset a worthwhile investment.

In the latter case, the rate of return is a benchmark for comparison and can be used to compare assets for purposes of making a decision on which one(s) are preferred for the upcoming investment period. Alternatively, one can use the required rate of return to rank assets in order of preference.

Third, the rate of return can be computed, for each asset, based on forecasts of behaviour of various factors that can influence the assets' performance in the coming period. The result of this computation is called the expected rate of return and can also be used for ranking or screening of competing assets in a given investment year.

We'll take a further look at various investment concepts in the next lesson.

27/08/2015

Many thanks to everyone who have liked our page. Please "tune in" regularly for incisive financial updates and debates. . .

25/08/2015

Early this year, there were predictions that the stock markets, especially for the USA would crash later in 2015. This has now come to pass with the Dow having shed off more than 1000 points in a few days. We, at GOTCH Professionals, covered it in these pages. We therefore know that stock markets all over the world have been bubbling and a price correction was imminent. Yet everyone is now trying to find an explanation for the crash. Some attribute it to China's economy, others to oil markets. The question we should be asking is not what causes a market correction (correction cannot be caused) but rather what triggers it. Several explanations are in the literature including profit taking and irrational exuberance turning rational. For instance, the Chinese economy has been booming largely due to export subsidy availed by an undervalued yuan. This causes firms to report artificially inflated performance, buoyed by exchange rate gains. In the process, stock market players bid up stock prices in manners not supported by economic fundamentals. At some point or another, fundamentals are bound to reflect on companies' performance, causing a market correction. Because of greater international stocj market integration associated with globalisation, the effect of market revision in one part of the world is generally felt worldwide.

16/10/2014

US economic "turns" typically lead or coincide with those of several countries in the world. A US stock market crash, now believed imminent, could be catastrophic to several economies around the world. Thousands of millions of US dollars may be wiped out of investments within short periods of time. If you are a stock market investor or you have a long position on portfolio holdings with offshore exposure, you better start reading the stock market a lot more keenly. . .

http://www.moneynews.com/MKTNewsIntl/stock-market-crash-warren-buffett-indicator/2014/10/03/id/598461/?dkt_nbr=4ybr6ldw

With a stock crash looming, Mike Carr shows a crash alert system which can keep your portfolio safe and profitable in any condition.

20/08/2014

Executive pay remains a controversial corporate governance issue as illustrated by the Kenya Airways (KQ) case. One may be interested to understand the composition of the KQ board. Does the company have, for instance, external board members? What exactly are the key performance metrics on which executive compensation is pegged? How are those drivers related to shareholder wealth? How efficient are KQ's operations? What specific procedures has the board put in motion to ensure efficiency?

http://www.businessdailyafrica.com/Corporate-News/KQ-executive-pay-rises-33pc-in-year-of-Sh3b-loss/-/539550/2424768/-/sfjwt5/-/index.html

Top Kenya Airways executives’ pay rose by one third in the past financial year, defying the multi-billion-shilling loss that the airline reported in the same period.

05/04/2014

Personal finance lessons: RETURN 1

Previously, we addressed the question as to what risk means in personal finance. As we explained, risk is defined as variability in possible returns. But what is "returns"? In lay man terms, return is that which an investor obtains "over and above" their initial wealth outlay. In practical investment usage, the term return incorporates both gains and loses on an investment.

Suppose that an investor bought an asset at, say, USD 100 on January 1 and the value of the asset was USD 96 as of December 31. The asset paid a cash flow (think of dividend on a stock holding, for instance) of, say, USD 3 during the year. Thus, the investor's net worth at the end of the year is USD 99.

For the investment year, therefore, our hypothetical investor has lost USD 1 on the asset. The investor's return for the period is -USD 1. Return is generally expressed as a percentage of some other value, typically the beginning amount invested. In our simple illustration, the investor is said to have "earned" a return of -1% (that is, -1/100). In the next lesson, we'll address this percentage expression at some length.

Have a wise weekend.

20/09/2013

Personal Finance Lessons: RISK 5

So, why are Treasury securities used as the risk-free asset proxies? Simple: the absence of default risk. As we mentioned in our first lesson, default risk is the greatest source of risk for all fixed income securities. When such a security has absolutely no default risk, it is as good as risk-free.

However, such a security is only considered risk-free if it has a maturity that matches an investor's investment horizon. This is because the presence of reinvestment rate risk (lesson 3) and interest rate risk (lesson 4) make the security risky from the perspective of an investor whose investment horizon is different from the security's maturity.

To conclude, Treasury securities are an appropriate proxy for the risk-free asset. We may also add that the ability to guarantee payment for these securities depends (remotely as it may sound) on sovereign risk. The guarantee is conditional on the government/state not collapsing. If the government goes the Somali way, it's credit backing is completely eroded.